Dynamic Price Discrimination and Quality Provision Based on Purchase History
AbstractThis paper develops a general two-period model of product line pricing with customer recognition. Specifically, we consider a monopolist who can sell vertically differentiated products over two periods to heterogeneous consumers. Each consumer demands one unit of the product in each period. In the second period, the monopolist can condition the price-quality offers on the observed purchasing behavior in the first period. In this setup, the monopolist can price discriminate consumers not only by quality, but also by purchase history. Several interesting results are derived. First, we fully characterize the monopolist's optimal pricing strategy when there are two types of consumers, and a simple condition is given to determine whether the monopolist will price discriminate by quality in the first period. We compare it to the case when there is no customer recognition or the firm is able to commit to its future actions. When the type space is a continuum, we show that there is no fully separating equilibrium, and some properties of the optimal contracts (price-quality pairs) are characterized within the class of partitional PBE.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9855.
Date of creation: Oct 2007
Date of revision: Aug 2008
Price discrimination; Supermodularity; Submodularity; Behavior-Based Pricing; Ratchet Effect; Bunching;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-14 (All new papers)
- NEP-MIC-2008-08-14 (Microeconomics)
- NEP-MKT-2008-08-14 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- Gale, I.L. & Holmes, T.J., 1990.
"Advance-Purchase Discounts And Monopoly Allocation Of Capacity,"
9005, Wisconsin Madison - Social Systems.
- Gale, Ian L & Holmes, Thomas J, 1993. "Advance-Purchase Discounts and Monopoly Allocation of Capacity," American Economic Review, American Economic Association, vol. 83(1), pages 135-46, March.
- Laffont, Jean-Jacques & Tirole, Jean, 1988.
"The Dynamics of Incentive Contracts,"
Econometric Society, vol. 56(5), pages 1153-75, September.
- Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
- Deneckere, R. & McAfee, R.P., 1995.
9508, Wisconsin Madison - Social Systems.
- Alessandro Acquisti & Hal R. Varian, 2005.
"Conditioning Prices on Purchase History,"
INFORMS, vol. 24(3), pages 367-381, May.
- J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
- Eric T. Anderson & James D. Dana, Jr., 2009. "When Is Price Discrimination Profitable?," Management Science, INFORMS, vol. 55(6), pages 980-989, June.
- Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
- David P. Myatt & Justin P. Johnson, 2002.
"Multiproduct Quality Competition: Fighting Brands and Product Line Pruning,"
Economics Series Working Papers
105, University of Oxford, Department of Economics.
- Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
- Salant, Stephen W, 1989. "When Is Inducing Self-selection Suboptimal for a Monopolist?," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 391-97, May.
- Pascal Courty & Li Hao, 1997.
Economics Working Papers
224, Department of Economics and Business, Universitat Pompeu Fabra.
- Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
- Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
- J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
- Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
- J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, vol. 17(2), pages 156-169.
- Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August.
- Oliver D. Hart & Jean Tirole, 1987.
"Contract Renegotiation and Coasian Dynamics,"
442, Massachusetts Institute of Technology (MIT), Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.